Short Stuff: Tulipmania

The world experienced its first economic bubble when the Dutch went bonkers for tulips in the 1630s. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

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• 0:04Josh Clark?

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• 0:39Josh Clark?

  Hey, and welcome to the short stuff. I'm Josh and there's Chuck and Jerry sitting in for Dave and this is short stuff about tulip mania.

• 0:48Speaker 02

  That's right. Tulip mania was perhaps the first financial bubble to happen and then burst. And we should probably talk a little bit about what an economic bubble is, don't you think?

• 1:01Josh Clark?

  Yeah. It's where the price of a good or an asset or something like that, let's just say item.

• 1:08Speaker 02

  Sure.

• 1:08Josh Clark?

  Goes sky high, way, way, way beyond any reasonable value that it should have. And that's because of exuberant trading. And the more exuberant the trading is, the more people get sucked in by it and they want to make this some money too. So more people start investing and the prices keep going higher and higher and higher. That's the first part of the bubble. There's another less happy side of the bubble too.

• 1:33Speaker 02

  That's right. Because as anyone who's ever been to a bubble rave or a played bubbles with your kids or just adult friends who enjoy bubbling, that bubble's going to burst. They all will eventually. And that's what happens with an economic bubble too. The price will drop usually pretty quickly and a lot of people start selling off very quickly and those who get out early enough can usually avoid it. But every single time, someone is going to be left holding that asset that is all of a sudden not worth much of anything. And a lot of times these people have invested their entire life savings in this stuff. A lot of times they've bought this stuff on credit and all of a sudden this thing isn't worth that much money and they're in real, real financial trouble.

• 2:17Josh Clark?

  Yeah, it's a bad scene.

• 2:18Speaker 02

  Yeah.

• 2:19Josh Clark?

  And so like you said, all the way back in the 17th century, people consider the first economic bubble to have surrounded tulips and tulip bulbs in Holland.

• 2:29Speaker 02

  That's right. And when you said tulip mania.

• 2:32Josh Clark?

  Yeah.

• 2:33Speaker 02

  That's really what it was called. You weren't just being cheeky.

• 2:36Josh Clark?

  No, that's what it's referred to. I'm sure among economists, among historians, among the Dutch, among podcasters, it's called tulip mania. That wasn't just me being funny.

• 2:49Speaker 02

  So, a little bit about tulips. Native to places like Kazakhstan and Eastern Europe and the Himalayas, they don't look like the tulips in their original form that we think of today. But they've been cultivated over the years and, you know, crossbred to where they look like they look like tulips now. These beautiful, we even have tulips popping up here in Atlanta already this spring. And they're lovely. They're grown from bulbs and they're, I don't know about how easy or hard it is, but they, like I said, are crossbred to create new and exciting varieties and colors.

• 3:24Josh Clark?

  Yeah. So tulips first arrived in Holland around 1600. The Dutch East India Company was moving spices and exotic goods from the East to Europe, Holland in particular. And tulips arrived and for the first couple of decades, they were, you know, if you were a plant enthusiast, you probably had a tulip in your collection. If you were very, very rich and just wanted to show off how cutting edge you were, you might have some tulips in your garden. But they weren't a big deal until 1634. And the reason they became a big deal almost overnight was because those same upper classes and nobility in Holland

• 4:07Josh Clark?

  decided that tulips were now a status symbol. And that if you didn't have tulips growing in your garden and you were a member of the aristocracy or nobility, you were a total loser with a capital L.

• 4:20Speaker 02

  That's right. So in this case, you had, economically speaking, you had a big time demand all of a sudden. But not only was it a big time demand, it was a big time demand of people that had a lot of money. So the price went through the roof very, very quickly. A bulb, a single bulb.

• 4:39Speaker 02

  One tulip bulb would fetch 2,000 florin. And just to put it into perspective, what you could buy back then for 2,000 florin, 16,000 pounds of cheese, 250 tons of beer, a couple of hundred sheep, or maybe 16 grown oxen. And they were paying prices in today's dollars, thank you Investopedia for doing this weird translation, but in today's dollars, for a single tulip bulb, they were paying 50 grand, 150 grand, even sometimes for the rarest varieties, up to a million dollars for a single bulb.

• 5:14Josh Clark?

  Yeah, that 50, you do 150 grand, that was like day-to-day stuff.

• 5:19Speaker 02

  Right.

• 5:19Josh Clark?

  That's what a single tulip bulb would go for.

• 5:23Speaker 02

  Single bulb!

• 5:24Josh Clark?

  It was nuts. Even at the time, there were people who were watching this and they were like, "This is crazy. They're tulips, for God's sake."

• 5:32Speaker 02

  Yeah, they're writing out a giant check with a feathered pen and they're just like, "I can't believe I'm paying this amount of money for a tulip."

• 5:39Josh Clark?

  Exactly. I say we take a break and come back and talk some more about tulip mania.

• 5:58Speaker 03

  First thought is like, "Wow, how are we gonna do all this?"

• 6:00Josh Clark?

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• 8:11Josh Clark?

  Okay Chuck, so we were just talking about how crazy expensive a single tulip bulb was in Holland in the 1630s.

• 8:19Speaker 02

  Single tulip bulbs?

• 8:20Josh Clark?

  Right. So some people, among the wealthy, would use like significant portions of their fortune, of their wealth, to buy tulips and just grow them. They weren't reselling them. They weren't doing anything. They were buying tulips and growing them. They were spending half of their net worth to buy tulips just to show off, right?

• 8:40Speaker 02

  Yeah.

• 8:41Josh Clark?

  At some point, people started saying like, "I think that if I start buying tulips and then selling them for a higher price, I could really make some money." And as a matter of fact, I can start speculating, where I will go into futures contracts with people and say, "Hey, I'll sell you X number of tulips in three weeks for X number of dollars, because I'm betting that the price is going to go down, but you're betting that the price is going to go up. Let's see who wins." And speculation is one of the main drivers essentially of an economic bubble. Like, it's crazy that the single bulbs were going for that, but once people started speculating and creating like instruments and futures contracts based on that crazy high price,

• 9:26Josh Clark?

  that's when it really started to get troublesome.

• 9:28Speaker 02

  Yeah, for sure. They were actually sold on the Dutch Stock Exchange. And these were, you know, some wealthy investors, but everybody got in on the gang, like, the gang? The game. Just regular, middle, working-class people, even like, people of the lower classes. They started cashing in everything they could, selling their houses in some cases, selling their, the tools of their trade that they were previously making money on, to invest in these tulips. And, you know, what's gonna happen is that eventually is gonna burst, and it did so less than two years after this frenzied investment stuff started in 1636.

• 10:09Josh Clark?

  Yeah. The bubble burst because some people, like we said earlier, that there were some people who were like, "This is crazy." And even some speculators and people who were invested in tulips were like, "This is not going to last much longer. I'm going to get out." And as more people started to decide to get out, you can trigger a panic. And if you trigger a panic, all of a sudden, the bubble bursts and the price just drops precipitously. And that's what happened with the tulip mania bubble. A bunch of people who had large stocks of tulip bulbs when the price dropped almost overnight were ruined financially. They had, say, hundreds of thousands of dollars worth of tulips

• 10:51Josh Clark?

  that they'd paid hundreds of thousands of dollars for that were now worth hundreds of dollars. And it was a bad jam for anybody who was caught with tulip bulbs when the bubble burst.

• 11:02Speaker 02

  Yeah, I mean, it affected the wealthy, obviously, in some cases, but it also affected a lot of those people that were looking to get wealthy and did sometimes, you know, get, make a lot of money during this, you know, less than two-year period. But, you know, like I said, some people sold their homes and all of a sudden, they don't have a home and they're stuck with all these tulips.

• 11:20Josh Clark?

  Yeah.

• 11:21Speaker 02

  The trades, but people who, you know, sold their tools because they were like, "Hey, I'm in the tulip game now. I don't need these ironworking skills or tools." All of a sudden, they couldn't even go back to that trade because they didn't have the stuff they needed to do it. And the people who bought those future contracts were the people that were really, really in trouble, right?

• 11:40Josh Clark?

  Yeah, because again, you're saying, I will buy a thousand tulip bulbs in four weeks at, you know, a million dollars. And when the bubble burst and those tulip, the thousand bulbs were now worth a thousand dollars and you're on the hook to pay a million dollars for them?

• 11:59Speaker 02

  Yeah.

• 11:59Josh Clark?

  Those speculators were like, I'm not, I'm sorry, I'm not doing this.

• 12:03Speaker 02

  Or they can't.

• 12:05Josh Clark?

  Yeah, they might not have been able to any longer. But the suppliers who had these tulip bulbs and were technically owed a million dollars, regardless of what the tulip bulbs were, were worth, they won their bet. But they, they've still, the buyers would not pay the suppliers. And that's what really created this huge financial crisis. And it got bad enough. At first, the Dutch governments of the big cities, and I think the monarchy, did not get involved. They did not want to get involved. The courts were like, we're not going to hear any cases because these are bets as far as the law is concerned. And a bet isn't legally binding. But it was so bad, the Dutch economy was in such tatters because so many people had

• 12:50Josh Clark?

  gotten into tulips, Chuck, that they just, like you said, tradespeople just sold their tools, people sold their houses. The regular economy that was built on that kind of work and stuff like that, it sagged. It was unmaintained during this tulip mania. So it was a big problem that the Dutch had. So finally, some of the higher ups got involved and tried to figure this out.

• 13:14Speaker 02

  Well, they tried to, yeah, not to much effect, but they, the courts finally said, all right, we have to do something here. So why don't we work out a deal where the traders pay 10% of the contracts face value? But nobody was happy with that because the suppliers were still losing tons of money. The buyers still were in bad shape because the value of those tulips just, you know, plummeted. And 10% of a future contract was a lot more than they were worth now. And so, you know, nobody really won in the end. And It wrecked the Dutch economy for, you know, it took a couple of decades to sort of naturally heal itself back to where it was.

• 13:53Josh Clark?

  Yeah, that's what the Dutch government ultimately decided to do is nothing. And it just had to mend itself naturally as people got back to work and people sold their tulip bulbs for way less. But they did sell their tulip bulbs because the Dutch were still and are still kind of crazy for tulips.

• 14:10Speaker 02

  Oh, yeah.

• 14:11Josh Clark?

  They, I read that they still pay higher prices than other countries for tulip bulbs because people just know that the Dutch are crazy for tulips and they'll pay it. And I guess every, about this time of year, every year, the Dutch countryside just explodes in color.

• 14:27Speaker 02

  Yeah, it's gorgeous. And I can also recommend a classic Conan O'Brien bit. When he used to go on location and do remote stuff. He has a very, very funny one from, I believe, his like first iteration of his show. Where he and Andy went to Amsterdam and went out with a camera to the tulip farms and the tulip markets. And it was very, very funny. I'm sure you can still find it.

• 14:53Josh Clark?

  Thanks, man. Thanks for the recommendation. You got anything else?

• 14:57Speaker 02

  I have no other recommendations other than plant tulip bulbs. They're gorgeous.

• 15:01Josh Clark?

  Yeah, and beware economic bubbles.

• 15:03Speaker 02

  Yeah, that too.

• 15:04Josh Clark?

  Short stuff is apt.

• 15:09Speaker 06

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